The Chair of FED, Powel, announced that they decided to keep the interest rates stable for the last meeting of the year 2023. Though it is positive news for markets that have been under the influence of high interest rates and increasing costs of loans, there are some "hidden" risks according to the history of interest rate cuts.
The markets no longer focus on any positive or negative news as the new year is the only focus for everyone. The companies try to sell off their products to increase their profits and manage their stocks whereas people are getting prepared for the new year and there is less focus on the markets.
When the new year begins, we will start to get either good or bad news that may affect the markets. Aside from the expected announcement of Bitcoin ETFs by the SEC, the markets may begin selling the narrative of recession or buying the interest rate cuts in March 2024.
Interest Rate Cuts & Tightening
The employment rates are still high and the economy is vivid. So far there is no risk of recession on the horizon.
When we have a look at the history of interest rate peaks and the post effects of interest rate cuts, we see two important times before 2000. They were the times when the whole world was under high pressure of political tensions and the ties with the Gold Standard were broken.
Economic Policy Institute
These times were harsh for the citizens of global world because of the first experiences in a spoiled fiat money system and geographic risks around the world.
However, the case was different after 2000.
CME Group
As the location and politics started to lose their influence, the crisis related to debts and the bubbles rose.
When the bonds yield lower returns and the central bank keeps tightening strictly, the economies cannot resist the overwhelming power of recession.
Where are We Now?
So far we have not seen any interest rate cuts, rather, the FED has just ceased the interest rate hikes before the year ends. It i better to remember the fact that recession comes before the data matures. We always learn if we are in a recession after 6 months. This is a long time for an investor to adjust the position accordingly. Thus, the investors are not eager to put more money in the markets because of several risks.
The first risk is the lose of a job. The recession forces businesses to shrink their operations and decrease the number of employees to continue the operations in profit. Secondly, the markets may head downward as the businesses may not be able to make money. Finally, there might be an avalanche of bankruptcies if the zombie companies cannot manage their debt and find new loans to save the month.
The dynamic outlook of the labor market is still a good sign for us to assume that recession is not around the corner. Yet, the more tightening continues, the likelier the risk of a recession gets. It might be too late when we realize it but the eyes will always be on the markets' trends and the velocity of money in the economies.
A slow down of the economy never ends well for common people. The rich companies buy the bankrupt small companies for almost free while people deal with the problems in their daily lives to survive. Thus, it is recommended to have either liquid money or assets that can be converted to liquid fiat money such as Gold and Bitcoin
We may discuss how to survive and what to do in a recession later.
What do you think about the growing risk of recession? Share with us below ??
